Year-End Estate Tax Planning

Case Study

27 Nov Year-End Estate Tax Planning

In 2015, the federal estate tax exemption is $5.43 million. With little planning, a married couple can pass up to $10.86 million worth of assets to heirs, so no estate tax will go to the IRS. Those numbers will increase in the future with inflation.

With such a large exemption, you may think that estate tax planning is unnecessary. However, nearly half of all states have an estate tax (paid by the decedent’s estate) or an inheritance tax (paid by the heirs) or both. The tax rate goes up to 16 percent in many states or even higher in some.

In addition, state estate tax exemptions tend to be lower than the federal exemption, while in some states, there is virtually no exemption for certain estates. Therefore, you may find year-end estate tax planning to be worthwhile, even if you do not anticipate having an estate more than $5 million or $10 million.

Employing the exclusion

In terms of year-end planning, anyone with estate tax planning concerns (federal or state) should consider year-end gifts that use the annual gift tax exclusion, which is $14,000 in 2015. That is, you can give up to $14,000 worth of assets to any number of recipients, with no tax consequences. You do not even have to file a gift tax return.

Married couples can give up to $28,000 per recipient, from a joint account, or $14,000 each from individual holdings. Larger gifts probably will not be taxed because of a generous lifetime gift tax exemption, but you will be required to file a gift tax return and there could be future tax consequences.

Example: Walt and Vera Thomas have two children. In 2015, Walt can give $14,000 worth of assets to their son Rick and $14,000 to their daughter Ava. Vera can do the same, moving a total of $56,000 from their taxable estate.

Similar gifts might be made to parents you are helping to support. As explained previously in this issue, giving appreciated stocks and stock funds to loved ones may be an effective way to reduce exposure to any market retreat.

Whatever your purpose, keep in mind there is no spillover from one year to the next. If you miss making $14,000 annual exclusion gifts in 2015, you cannot double up with a $28,000 exclusion gift in 2016. Moreover, make sure that gifts are completed—checks must be cashed—by December 31. Therefore, you should put your plans for year-end gifts in motion well before year-end.

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